• • • Economics (UK English:,; US English:, ) is the that studies the,, and of. Economics focuses on the behaviour and interactions of and how work.
Following is the answer key for the recently conducted General Studies Paper – 1 (Set – C) of the UPSC civil services preliminary exam. We have tried to provide.
Analyzes basic elements in the economy, including individual agents and, their interactions, and the outcomes of interactions. Individual agents may include, for example, households, firms, buyers, and sellers.
Analyzes the entire economy (meaning aggregated production, consumption, savings, and investment) and issues affecting it, including unemployment of resources (labour, capital, and land), inflation, economic growth, and the public policies that address these issues (monetary, fiscal, and other policies). Other broad distinctions within economics include those between, describing 'what is', and, advocating 'what ought to be'; between economic theory and; between and; and between and. Contents • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • Term The discipline was renamed in the late 19th century primarily due to from ' to 'economics' as a shorter term for 'economic science'. At that time, it became more open to rigorous thinking and made increased use of mathematics, which helped support efforts to have it accepted as a science and as a separate discipline outside of political science and other social sciences. The ultimate goal of economics is to improve the living conditions of people in their everyday life.
Economic analysis can be applied throughout society, in,,, and government. Economic analysis is sometimes also applied to such diverse subjects as crime,, the,,,,, war,, and. A map of world economies by size of GDP (nominal) in USD,, 2014. There are a variety of modern; some reflect evolving views of the subject or different views among economists. Philosopher (1776) defined what was then called as 'an inquiry into the nature and causes of the wealth of nations', in particular as: a branch of the science of a statesman or legislator [with the twofold objectives of providing] a plentiful revenue or subsistence for the people. [and] to supply the state or commonwealth with a revenue for the publick services. (1803), distinguishing the subject from its uses, defines it as the science of production, distribution, and consumption of.
On the side, (1849) coined ' as an for, in this context, commonly linked to the pessimistic analysis of (1798). (1844) defines the subject in a social context as: The science which traces the laws of such of the phenomena of society as arise from the combined operations of mankind for the production of wealth, in so far as those phenomena are not modified by the pursuit of any other object. Provides a still widely cited definition in his textbook (1890) that extends analysis beyond and from the to the level: Economics is a study of man in the ordinary business of life.
It enquires how he gets his income and how he uses it. Thus, it is on the one side, the study of wealth and on the other and more important side, a part of the study of man. (1932) developed implications of what has been termed '[p]erhaps the most commonly accepted current definition of the subject': Economics is a science which studies as a relationship between ends and scarce means which have alternative uses. Robbins describes the definition as not classificatory in 'pick[ing] out certain kinds of behaviour' but rather analytical in 'focus[ing] attention on a particular aspect of behaviour, the form imposed by the influence of.' He affirmed that previous economists have usually centred their studies on the analysis of wealth: how wealth is created (production), distributed, and consumed; and how wealth can grow.
But he said that economics can be used to study other things, such as war, that are outside its usual focus. This is because war has as the goal winning it (as a sought after end), generates both cost and benefits; and, resources (human life and other costs) are used to attain the goal. If the war is not winnable or if the expected costs outweigh the benefits, the deciding actors (assuming they are rational) may never go to war (a decision) but rather explore other alternatives. We cannot define economics as the science that studies wealth, war, crime, education, and any other field economic analysis can be applied to; but, as the science that studies a particular common aspect of each of those subjects (they all use scarce resources to attain a sought after end). Some subsequent comments criticized the definition as overly broad in failing to limit its subject matter to analysis of markets. From the 1960s, however, such comments abated as the economic theory of maximizing behaviour and modelling of the subject to areas previously treated in other fields. There are other criticisms as well, such as in scarcity not accounting for the of high unemployment., a contributor to the expansion of economics into new areas, describes the approach he favours as 'combin[ing the] assumptions of maximizing behaviour, stable, and, used relentlessly and unflinchingly.'
One commentary characterizes the remark as making economics an approach rather than a subject matter but with great specificity as to the 'choice process and the type of that [such] analysis involves.' The same source reviews a range of definitions included in principles of economics textbooks and concludes that the lack of agreement need not affect the subject-matter that the texts treat. Among economists more generally, it argues that a particular definition presented may reflect the direction toward which the author believes economics is evolving, or should evolve. In, buyer and seller are not present and trade via intermediates and electronic information. Pictured:, Brazil.
Microeconomics examines how entities, forming a, interact within a to create a. These entities include private and public players with various classifications, typically operating under scarcity of tradable units and light. [ ] The item traded may be a tangible such as apples or a such as repair services, legal counsel, or entertainment. In theory, in a the (sum of) of quantity demanded by buyers and quantity supplied by sellers may reach over time in reaction to price changes; in practice, various issues may prevent equilibrium, and any equilibrium reached may not necessarily be. For example, if the supply of healthcare services is limited by, the equilibrium price may be unaffordable for many who desire it but cannot pay for it.
Various market structures exist. In, no participants are large enough to have the to set the price of a homogeneous product. In other words, every participant is a 'price taker' as no participant influences the price of a product. In the real world, markets often experience.
Forms include (in which there is only one seller of a good), (in which there are only two sellers of a good), oligopoly (in which there are few sellers of a good), (in which there are many sellers producing highly differentiated goods), (in which there is only one buyer of a good), and (in which there are few buyers of a good). Unlike perfect competition, imperfect competition invariably means market power is unequally distributed. Firms under imperfect competition have the potential to be 'price makers', which means that, by holding a disproportionately high share of market power, they can influence the prices of their products.
Microeconomics studies individual markets by simplifying the economic system by assuming that activity in the market being analysed does not affect other markets. This method of analysis is known as analysis (supply and demand). This method aggregates (the sum of all activity) in only one market.
Theory studies various markets and their behaviour. It aggregates (the sum of all activity) across all markets. This method studies both changes in markets and their interactions leading towards equilibrium. Production, cost, and efficiency. Main articles:,,, and In microeconomics, is the conversion of into.
It is an economic process that uses inputs to create a or a service for or direct use. King Kong Pc Game Crackdown. Production is a and thus a rate of output per period of time.
Distinctions include such production alternatives as for (food, haircuts, etc.) vs. (new tractors, buildings, roads, etc.), (national defence, smallpox vaccinations, etc.) or (new computers, bananas, etc.), and. Refers to the of production: the value of the next best opportunity foregone.
Choices must be made between desirable yet actions. It has been described as expressing 'the basic relationship between and '. For example, if a baker uses a sack of flour to make pretzels one morning, then the baker cannot use either the flour or the morning to make bagels instead.
Part of the cost of making pretzels is that neither the flour nor the morning are available any longer, for use in some other way. The opportunity cost of an activity is an element in ensuring that scarce resources are used efficiently, such that the cost is weighed against the value of that activity in deciding on more or less of it. Opportunity costs are not restricted to monetary or financial costs but could be measured by the of,, or anything else that provides the alternative benefit (). Inputs used in the production process include such primary as, (durable produced goods used in production, such as an existing factory), and (including natural resources). Other inputs may include used in production of final goods, such as the steel in a new car.
Describes how well a system generates desired output with a given set of inputs and available. Efficiency is improved if more output is generated without changing inputs, or in other words, the amount of 'waste' is reduced. A widely accepted general standard is, which is reached when no further change can make someone better off without making someone else worse off. An example with illustrative points marked. The (PPF) is an expository figure for representing scarcity, cost, and efficiency.
In the simplest case an can produce just two goods (say 'guns' and 'butter'). The PPF is a table or graph (as at the right) showing the different quantity combinations of the two goods producible with a given technology and total factor inputs, which limit feasible total output. Each point on the curve shows for the economy, which is the maximum feasible output of one good, given a feasible output quantity of the other good. Is represented in the figure by people being willing but unable in the aggregate to consume beyond the PPF (such as at X) and by the negative slope of the curve. If production of one good increases along the curve, production of the other good decreases, an. This is because increasing output of one good requires transferring inputs to it from production of the other good, decreasing the latter.
The of the curve at a point on it gives the between the two goods. It measures what an additional unit of one good costs in units forgone of the other good, an example of a real opportunity cost. Thus, if one more Gun costs 100 units of butter, the opportunity cost of one Gun is 100 Butter. Along the PPF, scarcity implies that choosing more of one good in the aggregate entails doing with less of the other good. Still, in a, movement along the curve may indicate that the of the increased output is anticipated to be worth the cost to the agents.
By construction, each point on the curve shows in maximizing output for given total inputs. A point inside the curve (as at A), is feasible but represents production inefficiency (wasteful use of inputs), in that output of one or both goods could increase by moving in a northeast direction to a point on the curve. Examples cited of such inefficiency include high during a or economic organization of a country that discourages full use of resources. Being on the curve might still not fully satisfy (also called ) if it does not produce a mix of goods that consumers prefer over other points. Much in is concerned with determining how the efficiency of an economy can be improved.
Recognizing the reality of scarcity and then figuring out how to organize society for the most efficient use of resources has been described as the 'essence of economics', where the subject 'makes its unique contribution.' A map showing the main for goods within. Specialization is considered key to economic efficiency based on theoretical and considerations. Different individuals or nations may have different real opportunity costs of production, say from differences in of per worker or / ratios. According to theory, this may give a in production of goods that make more intensive use of the relatively more abundant, thus relatively cheaper, input.
Even if one region has an as to the ratio of its outputs to inputs in every type of output, it may still specialize in the output in which it has a comparative advantage and thereby gain from trading with a region that lacks any absolute advantage but has a comparative advantage in producing something else. It has been observed that a high volume of trade occurs among regions even with access to a similar technology and mix of factor inputs, including high-income countries.
This has led to investigation of economies of and to explain specialization in similar but differentiated product lines, to the overall benefit of respective trading parties or regions. The general theory of specialization applies to trade among individuals, farms, manufacturers, providers, and.
Among each of these production systems, there may be a corresponding with different work groups specializing, or correspondingly different types of and differentiated uses. An example that combines features above is a country that specializes in the production of high-tech knowledge products, as developed countries do, and trades with developing nations for goods produced in factories where labour is relatively cheap and plentiful, resulting in different in opportunity costs of production. More total output and utility thereby results from specializing in production and trading than if each country produced its own high-tech and low-tech products.
Theory and observation set out the conditions such that market of outputs and productive inputs select an allocation of factor inputs by comparative advantage, so that (relatively) inputs go to producing low-cost outputs. In the process, aggregate output may increase as a. Such specialization of production creates opportunities for whereby resource owners benefit from in the sale of one type of output for other, more highly valued goods. A measure of gains from trade is the increased income levels that trade may facilitate. Supply and demand.
The model describes how prices vary as a result of a balance between product availability and demand. The graph depicts an increase (that is, right-shift) in demand from D 1 to D 2 along with the consequent increase in price and quantity required to reach a new equilibrium point on the supply curve (S). Have been described as the most directly observable attributes of goods produced and exchanged in a.
The theory of supply and demand is an organizing principle for explaining how prices coordinate the amounts produced and consumed. In, it applies to price and output determination for a market with, which includes the condition of no buyers or sellers large enough to have price-setting. For a given market of a, demand is the relation of the quantity that all buyers would be prepared to purchase at each unit price of the good. Demand is often represented by a table or a graph showing price and quantity demanded (as in the figure). Describes individual consumers as choosing the most preferred quantity of each good, given income, prices, tastes, etc. A term for this is 'constrained utility maximization' (with income and as the on demand). Here, refers to the hypothesized relation of each individual consumer for ranking different commodity bundles as more or less preferred.
The states that, in general, price and quantity demanded in a given market are inversely related. That is, the higher the price of a product, the less of it people would be prepared to buy (other things ). As the price of a commodity falls, consumers move toward it from relatively more expensive goods (the ). In addition, from the price decline increases ability to buy (the ).
Other factors can change demand; for example an increase in income will shift the demand curve for a outward relative to the origin, as in the figure. All determinants are predominantly taken as constant factors of demand and supply. Supply is the relation between the price of a good and the quantity available for sale at that price. It may be represented as a table or graph relating price and quantity supplied. Producers, for example business firms, are hypothesized to be profit-maximizers, meaning that they attempt to produce and supply the amount of goods that will bring them the highest profit. Supply is typically represented as a function relating price and quantity, if other factors are unchanged.
That is, the higher the price at which the good can be sold, the more of it producers will supply, as in the figure. The higher price makes it profitable to increase production. Just as on the demand side, the position of the supply can shift, say from a change in the price of a productive input or a technical improvement. The 'Law of Supply' states that, in general, a rise in price leads to an expansion in supply and a fall in price leads to a contraction in supply. Here as well, the determinants of supply, such as price of substitutes, cost of production, technology applied and various factors inputs of production are all taken to be constant for a specific time period of evaluation of supply. Occurs where quantity supplied equals quantity demanded, the intersection of the supply and demand curves in the figure above. At a price below equilibrium, there is a shortage of quantity supplied compared to quantity demanded.
This is posited to bid the price up. At a price above equilibrium, there is a surplus of quantity supplied compared to quantity demanded. This pushes the price down. The of supply and demand predicts that for given supply and demand curves, price and quantity will stabilize at the price that makes quantity supplied equal to quantity demanded. Similarly, demand-and-supply theory predicts a new price-quantity combination from a shift in demand (as to the figure), or in supply. For a given quantity of a consumer good, the point on the demand curve indicates the value, or, to consumers for that unit.
It measures what the consumer would be prepared to pay for that unit. The corresponding point on the supply curve measures, the increase in total cost to the supplier for the corresponding unit of the good. The price in equilibrium is determined by supply and demand. In a, supply and demand equate marginal cost and marginal utility at equilibrium. On the supply side of the market, some factors of production are described as (relatively) variable in the, which affects the cost of changing output levels. Their usage rates can be changed easily, such as electrical power, raw-material inputs, and over-time and temp work.
Other inputs are relatively fixed, such as plant and equipment and key personnel. In the, all inputs may be adjusted.
These distinctions translate to differences in the (responsiveness) of the supply curve in the short and long runs and corresponding differences in the price-quantity change from a shift on the supply or demand side of the market., such as above, describes the consumers as attempting to reach most-preferred positions, subject to and constraints while producers attempt to maximize profits subject to their own constraints, including demand for goods produced, technology, and the price of inputs. For the consumer, that point comes where marginal utility of a good, net of price, reaches zero, leaving no net gain from further consumption increases. Analogously, the producer compares (identical to price for the perfect competitor) against the of a good, with marginal profit the difference. At the point where marginal profit reaches zero, further increases in production of the good stop. For movement to market equilibrium and for changes in equilibrium, price and quantity also change 'at the margin': more-or-less of something, rather than necessarily all-or-nothing.
Other applications of demand and supply include the among the, including labour and capital, through factor markets. In a competitive for example the quantity of labour employed and the price of labour (the wage rate) depends on the (from employers for production) and supply of labour (from potential workers). Examines the interaction of workers and employers through such markets to explain patterns and changes of wages and other labour income,, and (un)employment, productivity through, and related public-policy issues. Demand-and-supply analysis is used to explain the behaviour of perfectly competitive markets, but as a standard of comparison it can be extended to any type of market. It can also be generalized to explain variables across the, for example, total output (estimated as ) and the general, as studied in.
Tracing the and quantitative effects of variables that change supply and demand, whether in the short or long run, is a standard exercise in. Economic theory may also specify conditions such that supply and demand through the market is an efficient mechanism for allocating resources. Main articles:,,, and People frequently do not trade directly on markets. Instead, on the supply side, they may work in and produce through firms.
The most obvious kinds of firms are, and. According to, people begin to organize their production in firms when the costs of doing business becomes lower than doing it on the market. Firms combine labour and capital, and can achieve far greater (when the average cost per unit declines as more units are produced) than individual market trading.
In markets studied in the theory of supply and demand, there are many producers, none of which significantly influence price. Generalizes from that special case to study the strategic behaviour of firms that do have significant control of price. It considers the structure of such markets and their interactions. Common market structures studied besides perfect competition include monopolistic competition, various forms of oligopoly, and monopoly. Applies analysis to specific decisions in business firms or other management units. It draws heavily from quantitative methods such as and programming and from statistical methods such as in the absence of certainty and perfect knowledge.
A unifying theme is the attempt to business decisions, including unit-cost minimization and profit maximization, given the firm's objectives and constraints imposed by technology and market conditions. Uncertainty and game theory.
Main articles:,, and in economics is an unknown prospect of gain or loss, whether quantifiable as or not. Without it, household behaviour would be unaffected by uncertain employment and income prospects, and would reduce to exchange of a single in each market period, and there would be no industry. Given its different forms, there are various ways of representing uncertainty and modelling economic agents' responses to it. Is a branch of that considers between agents, one kind of uncertainty. It provides a mathematical of, discussed above, to model different types of firm behaviour, for example in an oligopolistic industry (few sellers), but equally applicable to wage negotiations,,, and any situation where individual agents are few enough to have perceptible effects on each other. In, it has been used to model the strategies choose when interacting with others whose interests are at least partially adverse to their own.
In this, it generalizes maximization approaches developed to analyse market actors such as in the model and allows for incomplete information of actors. The field dates from the 1944 classic by and.
It has significant applications seemingly outside of economics in such diverse subjects as formulation of,,, and. May stimulate activity that in well-functioning markets smooths out risk and communicates information about risk, as in markets for, commodity, and. Or simply describes the allocation of financial resources. It also analyses the pricing of financial instruments, the of companies, the efficiency and fragility of,, and related government policy. Some market organizations may give rise to inefficiencies associated with uncertainty.
Based on 's ' article, the example is of a dodgy second-hand car market. Customers without knowledge of whether a car is a 'lemon' depress its price below what a quality second-hand car would be. Arises here, if the seller has more relevant information than the buyer but no incentive to disclose it. Related problems in insurance are, such that those at most risk are most likely to insure (say reckless drivers), and, such that insurance results in riskier behaviour (say more reckless driving). Both problems may raise insurance costs and reduce efficiency by driving otherwise willing transactors from the market ('). Moreover, attempting to reduce one problem, say adverse selection by mandating insurance, may add to another, say moral hazard., which studies such problems, has relevance in subjects such as insurance,,,, and.
Applied subjects include market and legal remedies to spread or reduce risk, such as warranties, government-mandated partial insurance, or, inspection, and for quality and information disclosure. Market failure. Can be a simple example of market failure. If are not borne by producers but are by the environment, accident victims or others, then prices are distorted.
The term ' encompasses several problems which may undermine standard economic assumptions. Although economists categorize market failures differently, the following categories emerge in the main texts. And may result in economic inefficiency but also a possibility of improving efficiency through market, legal, and regulatory remedies, as discussed above., or the overlapping concepts of 'practical' and 'technical' monopoly, is an extreme case of failure of competition as a restraint on producers. Extreme are one possible cause. Are goods which are undersupplied in a typical market. The defining features are that people can consume public goods without having to pay for them and that more than one person can consume the good at the same time.
Occur where there are significant social costs or benefits from production or consumption that are not reflected in market prices. For example, air pollution may generate a negative externality, and education may generate a positive externality (less crime, etc.). Governments often tax and otherwise restrict the sale of goods that have negative externalities and subsidize or otherwise promote the purchase of goods that have positive externalities in an effort to correct the price caused by these externalities. Elementary demand-and-supply theory predicts equilibrium but not the speed of adjustment for changes of equilibrium due to a shift in demand or supply. In many areas, some form of is postulated to account for quantities, rather than prices, adjusting in the short run to changes on the demand side or the supply side.
This includes standard analysis of the in. Analysis often revolves around causes of such price stickiness and their implications for reaching a hypothesized long-run equilibrium.
Examples of such price stickiness in particular markets include wage rates in labour markets and posted prices in markets from. See also: Public finance is the field of economics that deals with the revenues and expenditures of a entity, usually government. The subject addresses such matters as (who really pays a particular tax), cost-benefit analysis of government programmes, effects on and of different kinds of spending and taxes, and fiscal politics.
The latter, an aspect of, models public-sector behaviour analogously to microeconomics, involving interactions of self-interested voters, politicians, and bureaucrats. Much of economics is, seeking to describe and predict economic phenomena. Seeks to identify what economies ought to be like. Welfare economics is a normative branch of economics that uses techniques to simultaneously determine the within an economy and the income associated with it. It attempts to measure by examining the economic activities of the individuals that comprise society.
Main article: Macroeconomics examines the economy as a whole to explain broad aggregates and their interactions 'top down', that is, using a simplified form of theory. Such aggregates include, the, and price and subaggregates like total consumption and investment spending and their components. It also studies effects of and. Since at least the 1960s, macroeconomics has been characterized by further integration as to modelling of sectors, including of players, of market information, and. This has addressed a long-standing concern about inconsistent developments of the same subject. Macroeconomic analysis also considers factors affecting the long-term level and of national income.
Such factors include capital accumulation, and growth. A basic illustration of. The economics of a depression were the spur for the creation of 'macroeconomics' as a separate discipline field of study. During the of the 1930s, authored a book entitled outlining the key theories of.
Keynes contended that for goods might be insufficient during economic downturns, leading to unnecessarily high unemployment and losses of potential output. He therefore advocated active policy responses by the, including actions by the and actions by the government to stabilize output over the. Thus, a central conclusion of Keynesian economics is that, in some situations, no strong automatic mechanism moves output and employment towards levels. ' model has been the most influential interpretation of The General Theory. Over the years, understanding of the has branched into various, mostly related to or distinct from Keynesianism.
The refers to the reconciliation of Keynesian economics with, stating that Keynesianism is correct in the but qualified by neoclassical-like considerations in the intermediate and., as distinct from the Keynesian view of the business cycle, posits with. It includes Friedman's on consumption and ' theory, led by, and. In contrast, the approach retains the rational expectations assumption, however it assumes a variety of. In particular, New Keynesians assume prices and wages are ', which means they do not adjust instantaneously to changes in economic conditions.
Thus, the new classicals assume that prices and wages adjust automatically to attain full employment, whereas the new Keynesians see full employment as being automatically achieved only in the long run, and hence government and central-bank policies are needed because the 'long run' may be very long. The percentage of the, 1995–2012. The amount of unemployment in an economy is measured by the unemployment rate, the percentage of workers without jobs in the labour force.
The labour force only includes workers actively looking for jobs. People who are retired, pursuing education, or by a lack of job prospects are excluded from the labour force. Unemployment can be generally broken down into several types that are related to different causes. Classical models of unemployment occurs when wages are too high for employers to be willing to hire more workers.
Wages may be too high because of minimum wage laws or union activity. Consistent with classical unemployment, frictional unemployment occurs when appropriate job vacancies exist for a worker, but the length of time needed to search for and find the job leads to a period of unemployment. Covers a variety of possible causes of unemployment including a mismatch between workers' skills and the skills required for open jobs. Large amounts of structural unemployment can occur when an economy is transitioning industries and workers find their previous set of skills are no longer in demand. Structural unemployment is similar to frictional unemployment since both reflect the problem of matching workers with job vacancies, but structural unemployment covers the time needed to acquire new skills not just the short term search process.
While some types of unemployment may occur regardless of the condition of the economy, cyclical unemployment occurs when growth stagnates. Represents the empirical relationship between unemployment and economic growth. The original version of Okun's law states that a 3% increase in output would lead to a 1% decrease in unemployment. Inflation and monetary policy.
See also:,,, and is a means of final payment for goods in most economies and the in which prices are typically stated. Money has general acceptability, relative consistency in value, divisibility, durability, portability, elasticity in supply, and longevity with mass public confidence. It includes currency held by the nonbank public and checkable deposits. It has been described as a social convention, like language, useful to one largely because it is useful to others. In the words of, a well-known 19th-century economist, 'Money is what money does' ('Money is that money does' in the original). As a, money facilitates trade.
It is essentially a measure of value and more importantly, a store of value being a basis for credit creation. Its economic function can be contrasted with (non-monetary exchange).
Serial Number Freehand 9 Mac. Given a diverse array of produced goods and specialized producers, barter may entail a hard-to-locate as to what is exchanged, say apples and a book. Money can reduce the of exchange because of its ready acceptability.
Then it is less costly for the seller to accept money in exchange, rather than what the buyer produces. At the level of an, and evidence are consistent with a running from the total to the of total output and to the general. For this reason, management of the is a key aspect of. Fiscal policy. Main articles: and Governments implement fiscal policy that influence macroeconomic conditions by adjusting spending and taxation policies to alter aggregate demand. When aggregate demand falls below the potential output of the economy, there is an where some productive capacity is left unemployed.
Governments increase spending and cut taxes to boost aggregate demand. Resources that have been idled can be used by the government. For example, unemployed home builders can be hired to expand highways. Tax cuts allow consumers to increase their spending, which boosts aggregate demand. Both tax cuts and spending have where the initial increase in demand from the policy percolates through the economy and generates additional economic activity. The effects of fiscal policy can be limited.
When there is no output gap, the economy is producing at full capacity and there are no excess productive resources. If the government increases spending in this situation, the government use resources that otherwise would have been used by the private sector, so there is no increase in overall output. Some economists think that crowding out is always an issue while others do not think it is a major issue when output is depressed.
Sceptics of fiscal policy also make the argument of. They argue that an increase in debt will have to be paid for with future tax increases, which will cause people to reduce their consumption and save money to pay for the future tax increase. Under Ricardian equivalence, any boost in demand from fiscal policy will be offset by the increased savings rate intended to pay for future higher taxes. International economics. List of countries by GDP (PPP) per capita in 2014.
International trade studies determinants of goods-and-services flows across international boundaries. It also concerns the size and distribution of. Policy applications include estimating the effects of changing rates and trade quotas. Is a macroeconomic field which examines the flow of capital across international borders, and the effects of these movements on.
Increased trade in goods, services and capital between countries is a major effect of contemporary. The distinct field of examines economic aspects of the process in relatively focusing on,, and. Approaches in development economics frequently incorporate social and political factors. Economic systems is the of economics that studies the methods and by which societies determine the ownership, direction, and allocation of economic resources. An economic system of a society is the unit of analysis.
Among contemporary systems at different ends of the organizational spectrum are and, in which most production occurs in respectively state-run and private enterprises. In between are. A common element is the interaction of economic and political influences, broadly described as. Studies the relative performance and behaviour of different economies or systems. Export-Import Bank defines a Marxist-Lenninist state as having a centrally. They are now rare, examples can still be seen in, and. [ ] Practice.
Main articles:,, and Contemporary economics uses mathematics. Economists draw on the tools of,,,, and. Professional economists are expected to be familiar with these tools, while a minority specialize in econometrics and mathematical methods. Theory Mainstream economic theory relies upon quantitative, which employ a variety of concepts. Theory typically proceeds with an assumption of, which means holding constant explanatory variables other than the one under consideration. When creating theories, the objective is to find ones which are at least as simple in information requirements, more precise in predictions, and more fruitful in generating additional research than prior theories. In, principal concepts include,,,,,, and the.
Early models focused on modeling the relationships between aggregate variables, but as the relationships appeared to change over time macroeconomists, including, reformulated their models in. The aforementioned microeconomic concepts play a major part in macroeconomic models – for instance, in, the predicts that increases in the increase, and inflation is assumed to be influenced. In, slower growth in developed nations has been sometimes predicted because of the declining marginal returns of investment and capital, and this has been observed in the. Sometimes an economic hypothesis is only, not quantitative. Expositions of economic reasoning often use two-dimensional graphs to illustrate theoretical relationships. At a higher level of generality, 's treatise (1947) used mathematical methods to represent the theory, particularly as to maximizing behavioural relations of agents reaching equilibrium.
The book focused on examining the class of statements called operationally meaningful theorems in economics, which are that can conceivably be refuted by empirical data. Empirical investigation. Main articles: and Economic theories are frequently tested, largely through the use of using. The controlled experiments common to the are difficult and uncommon in economics, and instead broad data is; this type of testing is typically regarded as less rigorous than controlled experimentation, and the conclusions typically more tentative. However, the field of is growing, and increasing use is being made of.
Such as are common. Practitioners use such methods to estimate the size, economic significance, and ('signal strength') of the hypothesized relation(s) and to adjust for noise from other variables. By such means, a hypothesis may gain acceptance, although in a probabilistic, rather than certain, sense.
Acceptance is dependent upon the hypothesis surviving tests. Use of commonly accepted methods need not produce a final conclusion or even a consensus on a particular question, given different tests,, and prior beliefs. Criticism based on professional standards and non- of results serve as further checks against bias, errors, and over-generalization, although much economic research has been accused of being non-replicable, and prestigious journals have been accused of not facilitating replication through the provision of the code and data. Like theories, uses of test statistics are themselves open to critical analysis, although critical commentary on papers in economics in prestigious journals such as the has declined precipitously in the past 40 years.
This has been attributed to journals' incentives to maximize citations in order to rank higher on the Social Science Citation Index (SSCI). In applied economics, employing methods are quite common.
Large amounts of data are run through computer programs to analyse the impact of certain policies; is one well-known example. Has promoted the use of. This has reduced long-noted distinction of economics from allowed direct tests of what were previously taken as axioms. In some cases these have found that the axioms are not entirely correct; for example, the has revealed that people reject unequal offers.
In, psychologist won the in 2002 for his and 's empirical discovery of several and. Similar empirical testing occurs in. Another example is the assumption of narrowly selfish preferences versus a model that tests for selfish, altruistic, and cooperative preferences. These techniques have led some to argue that economics is a 'genuine science.' Main article: The professionalization of economics, reflected in the growth of graduate programmes on the subject, has been described as 'the main change in economics since around 1900'. Most major and many colleges have a major, school, or department in which are awarded in the subject, whether in the, business, or for professional study. In the private sector, professional economists are employed as consultants and in industry, including and.
Economists also work for various government departments and agencies, for example, the national,. The (commonly known as the Nobel Prize in Economics) is a prize awarded to economists each year for outstanding intellectual contributions in the field. Related subjects. Main articles:,,, and Economics is one among several and has fields bordering on other areas, including,,,,, and.
Law and economics, or economic analysis of law, is an approach to legal theory that applies methods of economics to law. It includes the use of economic concepts to explain the effects of legal rules, to assess which legal rules are, and to predict what the legal rules will be. A seminal article by published in 1961 suggested that well-defined property rights could overcome the problems of. Is the interdisciplinary study that combines economics, law, and in explaining how political institutions, the political environment, and the economic system (capitalist,, mixed) influence each other.
It studies questions such as how monopoly, behaviour, and should impact government policy. Have employed political economy to explore the ways in the past that persons and groups with common economic interests have used politics to effect changes beneficial to their interests. Is a broad subject area which includes topics related to and.
Reintroduced the concept of in relation to economics and energy from, as distinguished from what he viewed as the mechanistic foundation of neoclassical economics drawn from Newtonian physics. His work contributed significantly to and to. He also did foundational work which later developed into. The subfield of arose, primarily through the work of, and, as an approach to analysing the effects of economic phenomena in relation to the overarching social paradigm (i.e. Classic works include 's (1905) and 's (1900). More recently, the works of, and have been influential in this field.
A 1638 painting of a French seaport during the heyday of. Two groups, later called 'mercantilists' and 'physiocrats', more directly influenced the subsequent development of the subject. Both groups were associated with the rise of and in Europe. Was an economic doctrine that flourished from the 16th to 18th century in a prolific pamphlet literature, whether of merchants or statesmen. It held that a nation's wealth depended on its accumulation of gold and silver. Nations without access to mines could obtain gold and silver from trade only by selling goods abroad and restricting imports other than of gold and silver.
The doctrine called for importing cheap raw materials to be used in manufacturing goods, which could be exported, and for state regulation to impose protective tariffs on foreign manufactured goods and prohibit manufacturing in the colonies., a group of 18th-century French thinkers and writers, developed the idea of the economy as a of income and output. Physiocrats believed that only agricultural production generated a clear surplus over cost, so that agriculture was the basis of all wealth. Thus, they opposed the mercantilist policy of promoting manufacturing and trade at the expense of agriculture, including import tariffs. Physiocrats advocated replacing administratively costly tax collections with a single tax on income of land owners. In reaction against copious mercantilist trade regulations, the physiocrats advocated a policy of, which called for minimal government intervention in the economy. Adam Smith (1723–1790) was an early economic theorist.
Smith was harshly critical of the mercantilists but described the physiocratic system 'with all its imperfections' as 'perhaps the purest approximation to the truth that has yet been published' on the subject. Classical political economy. The publication of 's in 1776 is considered to be the first formalisation of economic thought. The publication of Adam Smith's in 1776, has been described as 'the effective birth of economics as a separate discipline.' The book identified land, labour, and capital as the three factors of production and the major contributors to a nation's wealth, as distinct from the physiocratic idea that only agriculture was productive. Smith discusses potential benefits of specialization by, including increased and, whether between town and country or across countries.
His 'theorem' that 'the division of labor is limited by the extent of the market' has been described as the 'core of a and ' and a 'fundamental principle of economic organization.' To Smith has also been ascribed 'the most important substantive proposition in all of economics' and foundation of theory – that, under, resource owners (of labour, land, and capital) seek their most profitable uses, resulting in an equal rate of return for all uses in (adjusted for apparent differences arising from such factors as training and unemployment).
In an argument that includes 'one of the most famous passages in all economics,' Smith represents every individual as trying to employ any capital they might command for their own advantage, not that of the society, and for the sake of profit, which is necessary at some level for employing capital in domestic industry, and positively related to the value of produce. In this: He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention.
Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it.
The (1798) used the concept of to explain low living standards., he argued, tended to increase geometrically, outstripping the production of food, which increased arithmetically. The force of a rapidly growing population against a limited amount of land meant diminishing returns to labour. The result, he claimed, was chronically low wages, which prevented the standard of living for most of the population from rising above the subsistence level.
Economist has criticized Malthus's conclusions. While Adam Smith emphasized the production of income, (1817) focused on the distribution of income among landowners, workers, and capitalists. Ricardo saw an inherent conflict between landowners on the one hand and labour and capital on the other.
He posited that the growth of population and capital, pressing against a fixed supply of land, pushes up rents and holds down wages and profits. Ricardo was the first to state and prove the principle of, according to which each country should specialize in producing and exporting goods in that it has a lower relative cost of production, rather relying only on its own production. It has been termed a 'fundamental analytical explanation' for. Coming at the end of the classical tradition, John Stuart Mill (1848) parted company with the earlier classical economists on the inevitability of the distribution of income produced by the market system. Mill pointed to a distinct difference between the market's two roles: allocation of resources and distribution of income.
The market might be efficient in allocating resources but not in distributing income, he wrote, making it necessary for society to intervene. Value theory was important in classical theory. Smith wrote that the 'real price of every thing. Is the toil and trouble of acquiring it'.
Smith maintained that, with rent and profit, other costs besides wages also enter the price of a commodity. Other classical economists presented variations on Smith, termed the '.
Classical economics focused on the tendency of any market economy to settle in a. The Marxist school of economic thought comes from the work of German economist. Marxist (later, Marxian) economics descends from classical economics. It derives from the work of. The first volume of Marx's major work,, was published in German in 1867. In it, Marx focused on the and the which, he believed, explained the exploitation of labour by capital.
The labour theory of value held that the value of an exchanged commodity was determined by the labour that went into its production and the theory of surplus value demonstrated how the workers only got paid a proportion of the value their work had created. Neoclassical economics. Main article: At the dawn as a social science, economics was defined and discussed at length as the study of production, distribution, and consumption of wealth by Jean-Baptiste Say in his Treatise on Political Economy or, The Production, Distribution, and Consumption of Wealth (1803). These three items are considered by the science only in relation to the increase or diminution of wealth, and not in reference to their processes of execution. Say's definition has prevailed up to our time, saved by substituting the word 'wealth' for 'goods and services' meaning that wealth may include non-material objects as well. One hundred and thirty years later, noticed that this definition no longer sufficed, because many economists were making theoretical and philosophical inroads in other areas of human activity.
In his, he proposed a definition of economics as a study of a particular aspect of human behaviour, the one that falls under the influence of scarcity, which forces people to choose, allocate scarce resources to competing ends, and economize (seeking the greatest welfare while avoiding the wasting of scarce resources). For Robbins, the insufficiency was solved, and his definition allows us to proclaim, with an easy conscience, education economics, safety and security economics, health economics, war economics, and of course, production, distribution and consumption economics as valid subjects of the economic science.' Citing Robbins: 'Economics is the science which studies human behavior as a relationship between ends and scarce means which have alternative uses'. After discussing it for decades, Robbins' definition became widely accepted by mainstream economists, and it has opened way into current textbooks. Although far from unanimous, most mainstream economists would accept some version of Robbins' definition, even though many have raised serious objections to the scope and method of economics, emanating from that definition. Due to the lack of strong consensus, and that production, distribution and consumption of goods and services is the prime area of study of economics, the old definition still stands in many quarters. A body of theory later termed 'neoclassical economics' or ' formed from about 1870 to 1910.
The term 'economics' was popularized by such neoclassical economists as as a concise synonym for 'economic science' and a substitute for the earlier '. This corresponded to the influence on the subject of mathematical methods used in the.
Neoclassical economics systematized as joint determinants of price and quantity in market equilibrium, affecting both the allocation of output and the distribution of income. It dispensed with the inherited from classical economics in favour of a theory of value on the demand side and a more general theory of costs on the supply side. In the 20th century, neoclassical theorists moved away from an earlier notion suggesting that total utility for a society could be measured in favour of, which hypothesizes merely behaviour-based relations across persons. In, neoclassical economics represents incentives and costs as playing a pervasive role in shaping. An immediate example of this is the of individual demand, which isolates how prices (as costs) and income affect quantity demanded.
In it is reflected in an early and lasting with Keynesian macroeconomics. Neoclassical economics is occasionally referred as orthodox economics whether by its critics or sympathizers. Modern builds on neoclassical economics but with many refinements that either supplement or generalize earlier analysis, such as,, analysis of and, and the of for analysing long-run variables affecting. Neoclassical economics studies the behaviour of,, and (called economic actors, players, or agents), when they manage or use resources, which have alternative uses, to achieve desired ends.
Agents are assumed to act rationally, have multiple desirable ends in sight, limited resources to obtain these ends, a set of stable preferences, a definite overall guiding objective, and the capability of making a choice. There exists an economic problem, subject to study by economic science, when a (choice) is made by one or more resource-controlling players to attain the best possible outcome under bounded rational conditions. In other words, resource-controlling agents maximize value subject to the constraints imposed by the information the agents have, their cognitive limitations, and the finite amount of time they have to make and execute a decision. Economic science centres on the activities of the economic agents that comprise society. They are the focus of economic analysis. An approach to understanding these processes, through the study of agent behaviour under scarcity, may go as follows: The continuous interplay (exchange or trade) done by economic actors in all markets sets the prices for all goods and services which, in turn, make the rational managing of scarce resources possible. At the same time, the decisions (choices) made by the same actors, while they are pursuing their own interest, determine the level of output (production), consumption, savings, and investment, in an economy, as well as the remuneration (distribution) paid to the owners of labour (in the form of wages), capital (in the form of profits) and land (in the form of rent).
Each period, as if they were in a giant feedback system, economic players influence the pricing processes and the economy, and are in turn influenced by them until a steady state (equilibrium) of all variables involved is reached or until an external shock throws the system toward a new equilibrium point. Because of the autonomous actions of rational interacting agents, the economy is a complex adaptive system. Keynesian economics. (right), was a key theorist in economics. Keynesian economics derives from, in particular his book (1936), which ushered in contemporary as a distinct field.
The book focused on determinants of national income in the short run when prices are relatively inflexible. Keynes attempted to explain in broad theoretical detail why high labour-market unemployment might not be self-correcting due to low ' and why even price flexibility and monetary policy might be unavailing. The term 'revolutionary' has been applied to the book in its impact on economic analysis. Keynesian economics has two successors. Also concentrates on macroeconomic rigidities and adjustment processes. Research on micro foundations for their models is represented as based on real-life practices rather than simple optimizing models.
It is generally associated with the and the work of. Is also associated with developments in the Keynesian fashion. Within this group researchers tend to share with other economists the emphasis on models employing micro foundations and optimizing behaviour but with a narrower focus on standard Keynesian themes such as price and wage rigidity. These are usually made to be endogenous features of the models, rather than simply assumed as in older Keynesian-style ones.
Chicago school of economics. Main article: The Chicago School of economics is best known for its free market advocacy and ideas.
According to and monetarists, market economies are inherently stable if the money supply does not greatly expand or contract., former Chairman of the Federal Reserve, is among the economists today generally accepting Friedman's analysis of the causes of the Great Depression. Milton Friedman effectively took many of the basic principles set forth by Adam Smith and the classical economists and modernized them. One example of this is his article in the 13 September 1970 issue of The New York Times Magazine, in which he claims that the social responsibility of business should be 'to use its resources and engage in activities designed to increase its profits.
(through) open and free competition without deception or fraud.' Other schools and approaches. Main article: Other well-known schools or trends of thought referring to a particular style of economics practised at and disseminated from well-defined groups of academicians that have become known worldwide, include the, the, the, and the.
Contemporary is sometimes separated into the Saltwater approach of those universities along the and coasts of the US, and the Freshwater, or Chicago-school approach. Within macroeconomics there is, in general order of their appearance in the literature;,, the neoclassical synthesis,,,, and. Alternative developments include,,,,,,,, and.